Corporate Law News

INSIGHT: CFO Sentiment and Strategy – How 2019 Will Play Out Amid Macro-Economic Developments

Jan. 4, 2019, 2:44 PM

At the onset of 2019, a range of external risks and uncertainties are weighing heavily on many members of senior management as they fine-tune their corporate spending plans to reflect macro-economic developments. Perhaps no issue is weighing more heavily on CFOs than the global trade conflicts and resulting wave of tariffs and retaliatory actions that for some companies are disrupting their supply chains and rippling through to their corporate bottom lines.

Indeed, CFOs of major North American companies who participated in Deloitte’s Q3 2018 CFO Signals™ survey overwhelmingly named the impact of trade policy and tariffs on their business as their biggest worry. They also lowered their expectations for their own companies’ growth across several key metrics, including revenue, earnings, and capital spending, signaling the challenges of the current times. With the on-again, off-again talk of trade war, the issue presents significant uncertainty for finance executives charged with increasing margins and managing the costs of their global supply chains, amid rising input costs.

As many U.S.-based organizations consider how to address the financial and operational risks trade policies might pose to their corporate plans, CFOs have a key role to play. For example, they will need to assess what it will take—and cost—to make their supply chains more cost effective, resilient, and nimble as markets and economies change. And they have an opportunity to use their role in leading capital allocation and sphere of influence to consider what investments, including digital technologies, can further modernize their supply chain and other key business functions to mitigate—and even get ahead of—trade-related business impacts and other external issues.

Following are steps CFOs can take to help build external pressures and uncertainties into their corporate planning.

Evaluate the Corporate Plan in Light of Global Trade Risks

With the supply chain looming as a major expenditure area in corporate plans, a critical first step is to understand the impact of higher supply chain costs on margins, and how much the company needs to spend to mitigate current tariff and trade impacts on the business. The right investments can not only help improve supply chain efficiency and resilience, but also enhance the organization’s ability to deliver product to marketplaces more reliably, and perhaps even expand sales.

To get there, CFOs can explore questions such as:

  • How much of the increased supply chain costs can or should be passed on to customers, and how much will fall through to the bottom line? In addressing these questions, it will be important to consider the pressure of maintaining competitive pricing for customers and consumers, especially given the amount of industry convergence and disruption.
  • How much would it cost to shift production to other geographies, including the U.S.? What would be the savings and benefits, such as improved resiliency and time to market? The answers would depend on several variables, such as whether a company has existing on-shore manufacturing capability that can be expanded, or a ‘warm’ idled site that can be brought back online, or if it needs to add new production assets.
  • What is the cost/benefit of spending capital to move production to different geographies, including the U.S.? For example, companies historically used an extended supply chain to save on costs. That typically meant having more inventory on hand to compensate for extra time required to fill the inventory pipeline. Shifting parts of the supply chain to an in-market production model may be more expensive in terms of investment and labor costs, but it could help insulate supply chains from far-off global events, improve inventory management via shorter lead times, and possibly provide new market opportunities in the U.S.

With no shortage of options on how to spend precious and limited cash, CFOs should work with their CEO to align the spending plan to strategic priorities, and then with supply chain leaders to consider the financial and business impacts of funding initiatives such as on-shoring or re-shoring production, moving parts of the supply chain to different geographies, diversifying supply chain suppliers, or investing in new opportunities.

Retool Planning with Digital Tools and Greater Supply Chain Collaboration

The exploding volumes of data available to companies contain insights that can be harnessed by digital technologies to meaningfully change the way planning decisions are made, from capital spending and technology investments to inventory management, costs and pricing. When it comes to scenario planning, for example, in-memory computing, predictive analytics, visualization tools, and algorithmic forecasting models enable management to ask “what if” questions and produce a range of scenarios on global trade impacts. CFOs can use these insights to more quickly and accurately understand the impact of uncertain market trends and events, and factor them into their planning.

But making optimal use of these digital planning tools requires integrating supply chain and other key business function leaders into the corporate planning process, more so than what might exist in many companies today.

Companies leading the way in integrated planning are already tying supply chain to corporate planning in a closer, formalized fashion and are embedding finance within the supply chain organization to foster stronger dialogue between the CFO and supply chain leaders during the planning process. That approach can provide supply chain leaders opportunities to more fully explain their proposals, and the CFO the chance to better understand the underlying business reasons and financial implications.

Given the speed and business impact of trade-related external risks facing many companies, the integration of technology into supply chain and corporate planning could become a standard practice over the next couple of years.

Identify Digital Technologies That Can Drive Supply Chain Innovation

The digital revolution is driving profound change in every core function, but perhaps none more so than the supply chain. A range of new digital technologies coming into the marketplace, including the Internet of Things, machine learning and AI, are enabling the creation of digital supply networks and “digital procurement” platforms. Such networks and platforms—and the wealth of data-rich insights they provide—can help supply chain organizations better understand the cost to serve across different channels, customers, and geographies, and light up dark spots of the supply chain to drive efficiency. To identify the digital tools that offer the best options for reducing supply chain costs and increasing global supply chains’ agility in the face of external events or uncertainties, CFOs should consider relaying on the expertise and insight of their CIO and supply chain leaders.

Many companies are still playing catch-up when it comes to figuring out how to most effectively leverage these digital tools for their supply chains and related investments and management. For example, in a recent survey of more than 200 manufacturing organizations conducted by Deloitte and the Manufacturers Alliance for Productivity and Innovation, more than half of surveyed manufacturers expect DSNs will provide significant benefits, but only 28 percent have started implementing them. How to best use them, where the next innovation is going to come from, and how they might affect the customer base remain open questions. While that opens the door to finding and investing in supply chain innovations that can drive competitive advantage, it may also raise risks around investments, implementation, and execution.

Given the pace of trade and market developments, the time may be near to replace the traditional notion of ‘put together a corporate plan and then track it monthly’ with a planning process that produces a deeper and more timely view of the capital resources the supply chain and other business functions need to execute the corporate strategy. For CFOs, being strategic about critical corporate planning decisions means they may have to be willing to help their companies take some calculated risks with their capital and spending decisions.

By Sanford (Sandy) Cockrell III, national managing partner of the U.S. CFO Program, Deloitte LLP, and the global leader of the CFO Program for Deloitte Touche Tohmatsu Limited; and Adam Mussomeli and Stephen Laaper, both principals with Deloitte Consulting LLP, and co-leaders of its Digital Supply Networks offering.

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